Modern Money Theory, explained.

Discussion in 'Economics' started by piezoe, Oct 28, 2020.

  1. piezoe

    piezoe

    This VOX article is a magnificent achievement. I can't recommend it highly enough to anyone curious about the new wave of thinking about money and economies known as MMT. MMT had its origin in the 1940s with economist Abba Lerner, was influenced by Minsky, then articulated by Bill Mosler, Randall Wray, and William Mitchell, particularly the latter two, and is now front and center in Political Economics.

    If you're curious about MMT but know little or nothing about it, I can highly recommend this VOX article as a jumping off point:

    https://www.vox.com/future-perfect/2019/4/16/18251646/modern-monetary-theory-new-moment-explained
     
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  2. zdreg

    zdreg

    I suppose I will read it to have additional ammunition to debunk the nonsense.
     
  3. morganist

    morganist Guest

    I have just read a paper by Dr Thomas Palley, which critique MMT. I have linked to it below.

    https://www.elgaronline.com/view/journals/roke/8-4/roke.2020.04.02.xml
     
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  4. bone

    bone ET Sponsor

    Great article, and I very much appreciate it. I think it's important to add some counterbalance. MMT is by no means a universally accepted tenet. The Vox article is really, really good at explaining MMT and what it might mean in terms of making more social welfare programs like guaranteed full employment "more palatable" to politicians.

    But before we get ahead of ourselves - there are plenty of detractors, including some powerful economists on the left. And when I say detractors, I mean the majority of the most respected economists around the world. Ideas like these need to get fleshed out in the public arena of ideas. If MMT can't get Keynesians like Paul Krugman and Thomas Palley on board - there's more heavy lifting to do, specifically with respect to address budget deficits and inflation. Other left-friendly prominent opponents include Lawrence Sommers and Kenneth Rogoff.

    The University of Chicago is an international heavyweight in the field of economics, with more Nobel laureates than any other school. (I'm biased) In 2019, they surveyed 38 of the best economists in the world on MMT. Here's the link: https://www.igmchicago.org/surveys/modern-monetary-theory/

    In a nutshell, most of them strongly disagreed with MMT. Read some of their comments below.

    From the University of Chicago MMT Survey, link provided above:

    "We decided to put the ideas to our US panel of economic experts by asking them whether they agreed or disagreed with the following statements, and if so how strongly and with what degree of confidence:


    (a) Countries that borrow in their own currency should not worry about government deficits because they can always create money to finance their debt.

    (b) Countries that borrow in their own currency can finance as much real government spending as they want by creating money.


    Of our 42 experts, 38 participated in this survey. On the first statement, only 1 expressed no opinion, 15 disagreed and 22 strongly disagreed. On the second statement, 3 expressed no opinion, 11 disagreed and 24 strongly disagreed.


    Weighted by each expert’s confidence in their response, the results were 72% strongly disagree and 28% disagree on the first statement; and 76% strongly disagree and 24% disagree on the second statement. While the statements that we put to our panel often command more than 80% levels of agreement (or disagreement), this kind of unanimity of opinion is rare.


    Among the short comments that the experts are able to include when they participate in the survey, Oliver Hart at Harvard made the same remark in response to both statements: ‘This kind of behavior can quickly lead to inflation or even hyperinflation once the economy is close to full capacity.’ So too did Steven Kaplan at Chicago, who answered both statements: ‘At some point it becomes untenable and the country becomes Venezuela or Zimbabwe.’


    On the first statement, Kenneth Judd at Stanford commented: ‘A government may be able to do this once but doing this systematically will make it impossible to sell bonds in the future.’ Robert Shimer at Chicago noted that: ‘The real value of the money supply is bounded above. At some point, this must create inflation.’ And Markus Brunnermeier at Princeton cited precedents for that outcome: ‘See numerous historical examples: Germany in 1920s, Latin America…’.


    On the second statement, Eric Maskin at Harvard observed: ‘There will come a point where the currency is so debased that further spending becomes difficult if not impossible.’ And Larry Samuelson at Yale added a further reference to history: ‘Creating money can finance a great deal of spending, but incidents of hyperinflation, collapse and other crises indicate there are limits.’


    Pete Klenow at Stanford provided links to further columns by Lawrence Summers and Paul Krugman. All comments made by the experts are in the full survey results."
     
    Last edited: Oct 28, 2020
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  5. morganist

    morganist Guest

    I have had a brief look at the paper at Vox and see that MMT seems to think interest rates are about governments spending money or selling treasury bonds to banks. What about risk? Risk the factor that makes interest rates higher or lower (the higher the risk the higher the interest rate and the lower the risk the lower the interest rate), anything outside of that is artificial control and distorts the risk of investments. I dislike interest rate economic control due to it distorting risk and use pension saving or pension reform to achieve economic targets instead.
     
  6. Overnight

    Overnight

    You and your pensions. It seems your entire macroeconomic view of finance is based on "pensions."

    Did you know that the majority of the world's workforce do not have pensions, or even know what the hell that is? Although, you ARE from England I think, so maybe your definition of "pension" is different from other places?
     
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  7. morganist

    morganist Guest

    Yes I don't know how much of a problem not managing pension saving is in the first place. It is a saving mechanism like the interest rate and people alter how they pay into their pension naturally. Just having a wide fluctuation opportunity for pension saving might be causing a lot of the ups and downs in rates of consumptions and in turn overall prices. Tightening pension saving allowances will stabilise the pension saving rates preventing these variances in saving and consumption rates. In short not managing pension saving may be the main reason you get inflation and deflation in the first place. Since it has been managed in the United Kingdom the economic targets have been like straight lines. See below.

    http://morganisteconomics.blogspot.com/2020/08/spending-variance-tightening-reducing.html

    Yes I agree many countries in the world don't have pension systems, but if they did they could solve many problems. In terms of first world countries they tend to have extensive pension saving systems. There are other aspects to my school of economic thought too including Supplementary Income Taxation Exemptions and Internationally Commercialised Innovation. But pensions is a massive part of economics, ignore it at great cost, embrace it at great cost efficiencies.
     
  8. bone

    bone ET Sponsor

    In many ways this Vox piece is indicative of modern journalistic practices. It puts forward a point that underscores a particular political agenda but it trivializes the considerable nuance and it glosses over the glaring problems involved with MMT. There is no search for the entire truth, no intellectual curiosity beyond the stated bias, no balance.

    In this case - the vast majority of expert economists, including arguably the three most prominent left wing economists of our day, say that MMT is unobtanium pixie dust. But the Vox reader would never know that from reading the article.
     
    Last edited: Oct 28, 2020
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  9. Poljot

    Poljot

    MMT means stealing from workers and giving to asset holders because the rich own most of the productive assets and workers wages (except for highly skilled knowledge) are always lagging behind real inflation so their buying power and savings constantly deteriorate.
     
    #10     Oct 28, 2020